What is Greenwashing?
Greenwashing is the act of purporting to be conducting company business, in an environmentally conscious manner, when in reality it is doing very little, if anything, to make a positive impact on the environment.
These companies spend significant resources on their marketing and advertising, to promote their products as green. But ultimately, consumers and investors are misled and inevitably, cannot trust the claims that are made. Greenwashing can apply to financial products, including so-called green investments, as much as it can to other products and services.
Clamp down on Greenwashing
In November 2022, The Financial Conduct Authority (FCA) published its consultation paper with proposals to implement a range of measures to clamp down on greenwashing. Sacha Sadan, the FCA’s Director of Environment Social and Governance (ESG), said:
‘Consumers must be confident when products claim to be sustainable that they actually are. Our proposed rules will help consumers and firms build trust in this sector. This supports investment in solutions to some of the world’s biggest ESG challenges. This places the UK at the forefront of sustainable investment internationally. We are raising the bar by setting robust regulatory standards to protect consumers in line with our wider FCA strategy.’
The measures seek to implement sustainability disclosure requirements, ensure financial products have the appropriate ‘green’ investment labels and restrict how sustainability-related terms are used in product names and their marketing.
The consultation closed in January 2023 and certain measures were introduced:
- The anti-greenwashing rule – this rule applies to all FCA authorised firms to ensure that their sustainability related claims are fair, clear, and not misleading (known as Sustainability Disclosure Requirements).
- Investment labels – these labels are aimed to help consumers, including retail investors, to navigate the investment product landscape and enhance consumer trust. They include naming and marketing rules, to protect consumer and equip them with information to identify products they wish to invest in, as well as disclosure of information regarding the investment chain, and increasing transparency in the market.
The label measures introduced currently apply to Asset Managers only, but as of September 2024, the FCA are considering the feedback, following its consultation on extending the measures to Portfolio Managers. There has been feedback from some Asset Managers that the implementation of the SDR, and labelling regime, is taking them longer than anticipated to comply with.
The impetus behind introducing these measures arose from the FCA’s ‘Financial Lives’ survey, which found there is significant consumer interest in sustainable investment. It found that:
- 81% of adults surveyed would like the way their money is invested to do some good as well as provide a financial return.
- 76% would like to invest in a way that protects the environment, and
- 74% would like to invest in a way that has a positive social impact.
In the UK, the Government has committed to achieve a net-zero economy by 2050. However, until then, companies and investment products are left to implement their own ESG strategies, whether required by law or because of growing public pressure. Investors can’t always be sure that the environmental and sustainability claims on products they are being sold, are clear and supported by objective evidence. In some cases, a ‘green’ financial product might have been promoted or sold in a misleading or perhaps even fraudulent way and may not quite be the ‘green’ product you thought it was.
Is Greenwashing a crime or a civil matter?
There will inevitably be times where consumers and investors fall victim to greenwashing; whether being sold an investment product purporting to invest in green and sustainable companies, that hasn’t done so, or perhaps by investing in a product advertised as being more green, Eco-friendly or sustainable than it really was. Inevitably, such mis-selling is likely to continue well after the FCA’s proposed new rules and it may amount to a criminal offence.
The FCA are yet to enforce these new rules, however, it is still early days. Nonetheless, it hasn’t stopped NGO’s and charities from calling out asset managers for alleged greenwashing over in France.
In October 2024, ClientEarth, an environmental charity based in London submitted a formal complaint to the Autorité des Marchés Financiers (AMF), highlighting discrepancies between BlackRock’s fund names and the actual holdings in those funds. According to ClientEarth, these 18 actively managed funds, which collectively exceed $1 billion, have 96% of their overall exposure tied to companies involved in developing or expanding fossil fuel production or capacity.
Tackling greenwashing is a priority for regulators worldwide and there has been growing trend in litigation in this area, whether it is Dutch campaigners litigating against KLM’s advertisements claiming that they offset the climate impact of their flights, to Australia’s Federal Court issuing a ruling against Vanguard Investments Australia for claims about an ethical bond fund which were false and misleading.
This is an ever-growing area of litigation, and the risks faced by businesses if the regulatory regime is misunderstood, can be highly detrimental. It is therefore good practice for companies to fully understand the regulators expectations, and ensure that a robust framework is in place that focusses on the transparency and verification of the data, the sustainability profile, the integrity and the supply chain of their “green” products
Natalie Tenorio-Bernal – updated October 2024